In its defense, PayPal has a clear user policy that allows it to “hold your funds for up to 180 Days if reasonably needed to protect against the risk of liability or if you have violated our Acceptable Use Policy”.

That’s little comfort when a young business — or a young person like Shelley Michaels (more on her in a minute) — is counting on a real-time payday from legitimate transactions.

In the case of Diaspora, the startup was running short of development funds and asked its users (more than 100,000 it seems) to make a “donation”. Donations are normal part of PayPal’s service, but the sudden call to action generated an unusually large number of transactions– $45,000 in all — which triggered the alarms at PayPal.

After hours of calling, pleading, and presenting evidence, Diaspora gave in. PayPal would not budge and has unilaterally invoked the 180-day cooling off period.

That’s fine for PayPal. They promise buyers a “$0 Liability” and will refund money from any bad transaction. So freezing funds is a great way to be sure they don’t finance some one else’s fraud.

But the policy itself sounds like a bit of fraud to me. If only because it is vague and arbitrary. Both Diaspora and Shelley Michaels provided more than enough evidence to prove that the money was earned legally and ethically. Evidently, that is not enough. And it is unclear what other standard of proof PayPal requires.

In Shelley’s case, the law came down on her side. A court in her hometown (she lives in the UK) decided against the PayPal action (though not against the policy), and awarded Shelley her money plus interest and expenses.

Diaspora may not be so lucky. They could go 6 months without seeing any of the $45,000 life-line sent to them by their dedicated users.

And if the end result is one more dot-com death, the homicide should be pinned on PayPal.

These unfortunate events may be a death sentence for PayPal too. The number of alternatives continues to grow. Square, Stripe, and other payment technologies are not only on-line savvy but often mobile-enabled… easily leap-frogging how most of us use PayPal.

Amazingly, Stripe came to the rescue of Diaspora — setting up a new payment gateway within just hours. The money is still stuck in PayPal, but new dollars can flow to the company through Stripe.

The alternatives are looking more and more attractive. Certainly I’ll be thinking twice before putting a PayPal ‘buy” button on my next big project.

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